Licensing of Technology in the Oil and Gas Industry

In my first article of the Technology and Law series in the fall of the 2012 ­edition, I mentioned how the ­superstar ­companies of the Canadian oil and gas ­industry are not just exploration companies. Moreover, the list of oil and gas ­technology companies making big ripples is already ­impressive, and it is growing every year.

Licensing of technology in the industry has ­become a very significant revenue ­producer. For example, Zedi and ­Planglobal ­Systems Ltd., both Calgary-based ­corporations, ­recently joined forces to create Zedi ­Control Center LP, a new division that ­licenses ­technology to remotely monitor a wide range of production and well data in real time. Zedi continues to post record ­revenues, and, in the past couple of years, has ­aggressively increased their presence in the U.S. ­market. Similarly, Honeywell acquired the ­Edmonton-based Matrikon for $144 million to integrate into their oil and gas well ­automation and monitoring division. What is the common feature of these transactions? The technical and physical challenges of the Alberta oil have forced the market to be evermore ­innovative in extracting and servicing the industry. These initiatives have not gone unnoticed by the rest of the world, and the Canadian technologies are sought after in many markets, including the USA, North Sea, and the UAE. Technology licensing is a major part of such technology transfers.

Benefits to Licensing

• A license does not transfer ownership, and the licensor can decide which ­intellectual property it wants to license. This creates the ability to commercialize the technology ­without losing ownership and control over it.
• Because a license can be granted to ­multiple licensees, it creates a scalability of revenue for the licensor. It also allows for ­continuous revenue rather than a once-off purchase payment.
• The payment structure is flexible and can consist of up-front payments, ­milestone ­payments, and royalties. By using ­different combinations of these formulas, the ­licensor and licensee can tailor the cost of the ­licensing to increase or decrease with ­economic ­realities. For example, if the ­licensee will start slow but increase the use over time, a lower up-front cost, combined with benchmark ­payments as the use grows, will be fair to both parties.
• The licensee can control the revenue from and performance by the licensee by using contract terms, for example, to prescribe ­minimum production numbers. If these ­numbers are not met, the license can give the licensee the right to terminate the agreement.
• The joint venture created by a license ­often brings together the resources of ­different ­parties to increase total ­revenues for both. For example, a licensor that does not ­otherwise have the distribution, ­production, or ­manufacturing capacity to monetize its ­intellectual property can now do so by ­licensing the use of its technology to a ­licensee who does have the resources.
• The technology development curve often increases because of licensing. By having multiple licensees providing feedback about the technology, including different uses to the owner, the owner can incorporate and improve these into the product at an overall faster rate.

The License Agreement: Things to Keep in Mind.

The license agreement is a very flexible tool, and is ideal to structure a relationship that will work for all parties. Here are a few ­important considerations to keep in mind when ­negotiating the agreement.

Performance Benchmarks: Because the ­technology is not sold, the license can be granted for a specific term. Milestone and benchmark terms are often included to ­ensure a minimum level of royalty payments. If these are not met, the owner should be able to ­terminate the license and grant it to another, who will accomplish the benchmarks.

Exclusive versus a Sole License: The ­licensee may want to have the exclusive rights to use the technology in a certain territory, field of use, or specific market. This can also be ­structured as an exclusive agreement for a certain ­window of time to allow the licensee to establish a certain market share, after which the owner may license it to competitors. An exclusive license usually means that only the licensee may exploit the technology within the ­parameters of the exclusivity terms, and not even the licensor may use it. If the licensor may use the technology at the same time, the agreement is referred to as a sole license.

Right of First Refusal and Assignment: Many licensors have made the mistake of not ­negotiating assignment rights to the ­technology. Especially in a world where an exit by way of purchase is often a lucrative option for the licensor, it wants to ensure that it may assign the license to a potential purchaser who wants to buy the assets (not least of all the license agreements) without risking the continuity of the license. If such an assignment or sale right is not negotiated, the licensee can have unwanted control over the sale transaction. Conversely, if the use of technology under license is a major part of its assets, the licensee may want to negotiate a right of first refusal, allowing it the option to buy the technology first if there is a third-party offer.

Modifications and Improvements: As ­mentioned, the ownership of the technology does not pass with a license agreement. The licensor should ensure that all modifications and improvements made while in the hands of the licensee will automatically also become part of the technology, and ownership will rest with the licensor. This may sound technical, but an unscrupulous licensee may develop improvements that may allow it to register new intellectual property rights, such as patents to the improvements itself.

Protection of the Technology: These terms can take a number of forms in the ­agreement. An important point to ­negotiate is the ­reversionary right. If the licensee faces any business risks that may threaten the ­technology right ­(including a law suit), the agreement should allow an immediate ­reversion of all rights of use to the licensor. ­Related to this is a term that the licensee must assist the licensor in any suit aimed at ­protecting the technology. The licensor also needs protection against illegal ­actions of the licensee. For example, a common term is that the licensee will not use any ­information or benefit gained by the technology to ­circumvent any of the ­licensor’s business interests. This is often used to ­protect the licensor against attempts by the licensee to reverse engineer the technology and use for its own account.

The flexibility and creativity that a ­licensing ­arrangement allows makes it a very ­helpful and handy legal mechanism to ­facilitate the upward trend in the oil and gas ­industry. ­Licensing parties do not have to limit ­themselves to the traditional terms ­discussed, but can work together to jointly forge new terms to increase revenue and foster ­cooperation.